MacroScope

Brazil’s need for dollars to shrink in 2014 – but the long-term view remains bleak

Brazil’s current account deficit will probably narrow this year. That may sound as a reassuring (or rather optimistic) forecast after the recent sharp sell-off in emerging markets, which prompted Turkey to raise interest rates dramatically to 12 percent from 7.75 percent in a single shot on Tuesday. But that was the outlook of three major banks – HSBC, Credit Suisse and Barclays - in separate research published earlier this week.

The gap, a measure of the extra foreign resources Brazil needs to pay for the goods and services it buys overseas, will probably shrink to 3.0-3.4 percent of GDP in 2014, from 3.7 percent last year, they said.

“Brazil’s external vulnerabilities are overstated,” claims Barclays’ Sebastian Brown, adding: “the central bank’s FX intervention program should limit bouts of excessive BRL weakness.”

So far, so good. Brazilian international reserves are huge compared to other emerging countries at about $375 billion – a decent war chest. But looking beyond the day-to-day mood swings of financial markets, Brazil’s still deep current account deficit tells us a more worrying story about long-term prospects for economic growth in Latin America’s largest economy.

This is how it worsened over the past decade:

In 2005, when booming Chinese growth translated into golden years for Brazilian commodity exporters, Brazil had a current account surplus of little less than 2 percent. Since then, salaries and job creation grew steadily, fueling demand for foreign items; businesses also ramped up investment in many of those years, requiring specialized machinery and services from other countries.

Why is the Reserve Bank of India so quiet on the rupee?

 

When nobody’s listening, sometimes it pays to shout from the rooftops.

Based on the rupee’s daily pasting, the Reserve Bank of India might do well to look to the European Central Bank’s strong verbal defense of the euro just over a year ago.

In July last year ECB President Mario Draghi declared he would do “whatever it takes” to safeguard the euro’s existence.

That unexpectedly candid comment, uttered at a moment of rising market tension, wasn’t followed by concrete policy action. But markets took heed.

from Davos Notebook:

Of confidence and coconut trees

"Confidence grows at the rate that a coconut tree grows, but confidence falls at the rate that the coconut falls," Montek Singh Ahluwalia, deputy chairman of India's Planning Commission, told a panel in Davos.

He also indicated that India's decision not to float its currency and to build up massive reserves was correct, noting that this gave it a cushion during the downturn.

"Floating (currencies) would be fine, if that was what was meant, but what they mean by floating is crashing upwards and crashing downwards."